[Jump to the Biotech EFT List]
Biotech is a volatile industry, and as you might imagine, any Biotech ETF shares in that volatility. It is a industry known for sudden bursts in either direction depending on a company’s research, its results, and whether or not they’re positive or negative. The companies in this industry are unlike those in other industries, in that one failure in some research project can completely derail a stock’s (or related ETF’s) price, at least temporarily. Even slight hiccups in the research process can wildly affect the price of the stocks of these companies as well as Biotech ETFs. This is why it’s difficult to invest in this market; it requires extensive research and knowledge of both finances and biotechnology. Even still, it can be difficult to protect yourself against the major fluctuations in this market. It is known for being very unpredictable. If you don’t have the time, inclination, or ability to do the research involved, but still want to be involved in the biotech market, this is when you would go with a Biotech ETF.
A Biotech ETF is an exchange traded fund who’s holdings consist only of Biotech companies. Some of these biotechnology ETFs are heavily invested in only a few companies, while others have a broad selection of holdings to hedge itself against the unpredictability of each individual company . One of the advantages to trading and investing in this industry, despite it’s unpredictable nature, is that it’s a growth industry that is essentially recession-proof. Our need to research and develop new technologies in this area will continue to grow whether or not the economy is doing well. As our population and life expectancy increases, so too does the market for the biotech industry. In addition, instead of being the one-off lottery that has plagued the industry, the individual companies themselves are starting to expands their holdings and projects, thereby reducing their exposure to the risk of crashing from one bad investment. This improves the long-term viability of the biotech sector, and biotech ETFs and might put it on par with the stable investment in something like a commodity exchange traded fund.
Some fundamental analysts have concluded that many biotech companies may not have enough cash to last beyond the end of the year, which is more reason to diversify using an ETF. This will also weed out the weaker companies in the industry, and propel the rest forward as the playing field clears out. The companies with the highest potential for failure are the ones who have failed to adapt to the landscape, and still bet on those one-off projects instead of mitigating their risk. Adapt or perish, that’s the name of the game, and the biotech industry is no acception.
Biotech ETF List
Here is a Biotech ETF list, including the newest Proshares 2x Leveraged biotech ETFs:
- ProShares Ultra Nasdaq Biotechnology (BIB) – Typical of ProShares products, this is a multiply leveraged fund seeking to magnify the gains and losses of an index. In this case, it’s a 2x biotech ETF that seeks to double the returns of the NASDAQ Biotechnology Index. The fund’s daily holdings can be found here.
- ProShares UltraShort Nasdaq Biotechnology (BIS) – Again, typical of ProShares products, this is the reciprocal version of the 2x leveraged fund equivalent to -2x the returns of the NASDAQ Biotechnology Index. The fund overview can be found here.
- HOLDRS Biotech ETF (BBH) - BBH’s holdings are notoriously thin, typically holding between 10 and 20 stocks at any given time, with large percentages of their holdings in Amgen (AMGN) and Gilead Sciences (GILD). This is because their holdings are based on market cap. The larger the market cap is on a stock, the larger the percentage of their portfolio that stock will make up. This makes it the least diverse of the available funds. Considering that many people’s reason for investing in ETFs is diversification in a particular industry, BBH might not be the best choice. That doesn’t mean it’s doesn’t have value; it just presents more risk than other, more diverse, products. Its complete list of holdings can be found here.
- First Trust Amex Biotechnology Trust (FBT) – Similarly to BBH, FBT isn’t particularly diverse either. What FBT does have over BBH is that its holdings are spread out evenly amongst the stocks within its portfolio. The stocks in their portfolio also represent a larger range in the type of stocks it holds with a combination of the standards (GILD, BIIB) and some riskier stocks like Human Genome Sciences (HGSI). FTB’s holdings portfolio can be found here.
- iShares Nasdaq Biotechnology Trust (IBB) – IBB seeks to mirror the performance of the NASDAQ Biotechnology Index. Unlike the ProShares products, this fund isn’t leveraged – it’s a pure 1 to 1. Because it holds every stock in the index, it’s technically the most diverse of all available biotech ETFs. It’s portfolio is weighted by market cap though, so the largest stocks (AMGN, GILD, GELD, ADR) make up 25-30% of its holdings, while over 100 stocks make up less than 1% each. Many consider this the best biotech ETF due to its extreme diversity. It’s also is the most tradable of the funds because of its high daily liquidity. IBB’s entire holdings can be found here.
- PowerShares Dynamic Biotech & Genome Portfolio (PBE) – This funds holdings are based on a proprietary set of criteria called the “Intellidex.” Typically holding around 30 stocks, this fund doesn’t base it’s holdings percentages on market cap. This means that the stocks that they feel are there best according to their qualifications hold the top spots in their holdings. As of this publishing this includes Waters Corp. (WAT) at 5.69%, Millipore Corp. (MIL) at 5.45% and Alexio Pharmaceuticals Inc. (ALXN) 4.96%. Their entire holdings can be found here.
- SPDR S&P Biotech (XBI) – XBI seeks to follow the performance of the S&P Biotech. Generally containing around 30 stocks, this fund is considered rather diverse in its portfolio simply given the range of the types of stocks contained therein. It is an equally weighted fund, with each position coming in between 3 and 5% of the portfolio. An overview with a downloaded list of its current holdings can be found here.
After a relatively flat decade to start the century, it’s looking like the biotech industry may be poised for some solid growth over the next decade. These funds had quite a start to the year, and though this is being considered one of the growth markets for the next decade, it is not entirely immune to the fluctuations of the stock market. Many of these funds have given up their gains from the start of the year, but expect them to turn around if the market as a hole can gain some footing.
Disclosure: The author of this article holds no position in any of the funds or stocks mentioned in this article at the time of writing.